The Foreclosure Project: Final Numbers and Pictures are In!

In the previous article, I mentioned that we had rushed to finish the interior work as the house got snapped up by an eager family for a late December move-in. I posted some hasty photos from the few I had taken, and you readers requested more pictures and final details on the numbers regarding time and money spent for the renovation. So let’s start with the numbers:

Counting the primary partner hours at $35 as we did in the budget, this adds to a total renovation cost of: $24593

Wow, that IS remarkably close to the $25,000 I originally estimated before even buying the house. But there’s an upside to this – it includes lots of work we consciously threw in once we got going and decided to make the place nicer than originally planned. For example, at least $1000 went into jazzing up the front porch and its roof, I cut out cabinets and did plumbing to allow a new dishwasher, and we did more fancy bits of trim and woodwork around doors and inside closets than originally planned.

I feel that going for this slightly higher level of quality is what allowed the house to rent for $1200/month instead of $1100. When you consider the extra $1200 per year of rental income, forever, it actually justifies a $12,000 investment (assuming you want a 10% annual return on your investment). In this case, we got that extra boost by only spending a few thousand extra.

Just to review a few more of the key figures:

Original purchase price of the house: $113,500
(price was originally 115k, but at the last minute we negotiated an additional $1500 off the price for roof/plumbing repair)

That’s only a moderate cap rate by bigtime landlord standards, but it is exceptional for a single family residence in this area.

Apartment buildings and multiplexes are more profitable on the surface. But the Single Family house has certain advantages as well: maintenance and hassle is low as a percentage of the income, because you only deal with one person for this $1200 per month, while a landlord of $600 apartments has to manage two tenants.

If you think of it from an early retirement perspective, you can raise a family comfortably with just two or three rental houses like the one described in this article. That implies a nice, full, Early Retirement, on somewhere between $277,000 and $416,000 of savings. In exchange, you just have to manage 2-3 properties. They are effectively creating an 8.9% “safe withdrawal rate” instead of the industry-standard 4% that you use when planning a stock portfolio. (depending on your area, you may have to discount a certain percentage for vacancy, although I always shoot for 100% occupancy myself).

Another advantage of the SFR is that its underlying value can rise even faster than its rental income, in the event of a strong housing market. An apartment building is generally worth only a multiple of its rental income. A house, on the other hand, is worth whatever an emotionally-driven home buyer is willing to pay for it. With these upgrades, this house would sell for a little over $200,000 on today’s market. So even after paying ourselves separately for labor, we created a profit of over $60,000 in just three months. In the future, I believe this neighborhood will continue to appreciate more quickly than the rest of my city since there’s only one historic district, it is close to all of the city’s best amenities, it can never expand, and most people who move here from other cities tend to choose the “old-town” area as their first choice.

Some will say that I should therefore use $200k as the cost basis when calculating the cap rate, or that we should sell the house immediately and start again on another one. Both of these are valid arguments, but in this case my friend is the owner and wants to hold onto it for future income and appreciation. (I just have an interest-earning loan against it that will be paid back to me fairly quickly).

So with all of the business out of the way, let’s move on to the before and after pictures! Keep in mind when evaluating quality and fanciness that this is a high-speed and low-cost project. This work is not four-seasons-hotel-lobby quality – my only claim is that it represents a pretty thorough transformation of an entire house including lots of its hidden parts, for under $25,000 and in under ten weeks..

You can click on any image to get the full-sized version.

Note the wire barnacles, shredded roof, and sagging/rotted porch

The porch was rebuilt to have blue-stain pine columns and beadboard ceiling, as well as a galvanized roof just for some flair. Still to add: slate sides/steps

View of the back room and deck

View of back room and deck

More random wires removed, broken hot tub sold on Craigslist (!), deck stained, and of course house painted

Living room, before. Doesn't look that bad in the picture, although it had a cracked/sloped doorway to kitchen

New wider doorway with nicer trim - and straightened floors. (my friend the painter also sanded down and refinished all the wood floors)

Old kitchen countertop. Not a bad layout and somewhat quaint. But the shelves were only 13.5" from the countertop, and all components were just really shitty, especially the sink/faucet

I kept the same basic look but made new upper cabinets that fit the space better. Tiled the countertop and backsplash with virtually free recycled tiles. Changed door hardware, new sink/faucet. We also cut out one base cabinet and added a dishwasher instead, (acquired for $20!!)

For over sixty years, the fridge and stove sat in this ridiculous empty area across the kitchen. Somebody added a hot tub and air conditioning to this house, before they even had a place to put the package of EGGS before frying them for breakfast. INSANE!!!!

Two custom-built (but very low cost) shelving units with matching tile countertops to the rescue. Along with a flat-top range from Craigslist.

The third view of the kitchen - empty space near the window

We decided to keep the old pantry and just refurbish it, and the empty space was perfect for this nicer fridge.

The bathroom was by far the worst room in the house. Several ladies ran from it while holding their hands over their mouths to prevent vomiting. This picture, while taken after I had removed the old fixtures, still represents approximately how shitty it was.

The new bathroom is quite nice, but I still don't have any great pictures of it - it was too full of towels and toiletries to photograph on this day. But here you can at least see the custom shower curtain I welded up to match the shape of the tile showerpan I had built.

Bathroom wall, with hole for new second doorway framed in

New bathroom sink and table, made out of antique sewing table found for $20 used

The Back Room - before - Laundry machines were at the North end, which was blocking a bedroom window

After: moved laundry area to the South end, opening up the bedroom window area for this handy office area just off the kitchen

Random shot of a newer light fixture. Formerly there was a peeled white ceiling fan with a single globe light bulb - for the whole kitchen! Kitchens need multiple bright light heads that you can aim at different work areas.

Random shot of the new front door, with the cozy porch beyond, surrounded by real people's stuff. Home sweet home.

I really enjoyed this project, and I will probably repeat the process when I have enough uninvested cash collected to fund a similar one myself. Before then, I may even team up with another investor* to keep the fun going in the mean time (and accelerate the cash stashing process).

* Interested in being the investor? Or perhaps you have a house in Hawaii that needs attention during the winter season? Get in touch with me through the contact button of this blog! It’s just an off-the-cuff idea at this point, but you never know what good things come into being when you start throwing around inspirational business ideas with new people.

Epilogue, 1.2 years later: Wow, that little note at the bottom of this article did lead to lots of fun. I heard from at least a dozen interested investors (although I in the end I decided only to invest alone for my own projects, I’ve helped a few buy their own places separately). And The Hawaii comment led to this.

Update: Over three years have passed and this project continues to be a good memory. The house has experienced zero vacancy, no maintenance issues, and a strong local market has allowed the rental income to increase to $1700 per month.

Great job, MMM! I most definitely would like to discuss future projects when Mr O and I are in your neck of the woods next month. As I think I’ve mentioned before, this is exactly the kind of thing I’d be interested in doing after trading in my super boring office job :)

You mentioned “I just have an interest-earning loan against it that will be paid back to me fairly quickly” – does this mean you’re not going to benefit from the ongoing rental income, or do you have a stake there as well?

One of my goals for the year is to learn more about home renovation and hopefully practice at some point. We own a condo in Vancouver, but already had our bathroom re-done (shamefully I must admit we paid someone to do it…). So, probably no projects to be done on my own property. Any ideas for getting casual experience?

Alas, no rental income for me in this case, but I’m still happy to have my friend get such a big boost towards his own early retirement.

I still get paid for my work, plus some interest, and I’ll of course invest those earnings somewhere else for continued gains. So it’s the same thing in the long term.

For casual experience, the best place is your own house (because there is no schedule and you have to learn), but you can also volunteer with some place like Habitat for Humanity. Or offer to help any of your friends who are already skilled at these things, with their own projects. During this project I kept the offer open for free on-the-job training in exchange for casual labor, but I didn’t get any takers :-)

Have you considered a side business advising people on the goals/possible measurements of future kitchens? For example, you mention how close the shelves were to the countertop – what would a more ideal range be?

For a certain price, people could submit their kitchen redesign questions/plans and you could comment on them. If they attached photos and their own measurements, you could respond to them at your leisure.

Very nice idea! Helping people with home design would definitely be fun. It could even become a full career for a non-retired person.

In my own case, I just take on projects when they fit into our generally random and unpredictable family life. So anyone is free to email me with work and project ideas at any time.

To answer your actual question – the kitchen cabinets should have from 16-24″ of clearance between the cabinet bottom and the countertop. This lets you fit things like coffee machines and blenders in without being crammed, and also allows you to see the back of the countertop without bending down. Shorter people usually go for the low end of this range (so they can reach more of the upper shelves), and taller people including me like the cabinets higher. I think I went for 18″ in this case.

The front door as well as some of the house’s exterior accent trim is purple, because PURPLE IS AWESOME!! The curtain was put up by the tenant – it is probably purple because the front door was purple.

Perhaps you have not lived in a historic neighborhood before, but around here all the houses have bold colors – orange, red, ocean blue, green, purple, chocolate brown. As the neighborhood continues to turn over to a younger and wealthier generation, the great color schemes keep outdoing each other, like a bit of a friendly contest. Fantastic desert-compatible front gardens and landscaping replacing boring lawns are another positive side-effect.

I suppose if there were a man who was crazy or insecure enough to be afraid of the color Purple, it would be good to discourage him as a renter as well. ;-)

I have a question about your annual expenses. I see you have property taxes and insurance listed, but what about things like water, garbage pickup, sewer fees, etc.? Are those included in the $1600? Do renters typically pay for water in that area? I’m a landlord and I don’t charge separately for water and garbage (which are billed separately and quarterly in my area). It really adds up to the tune of about $600 / year / unit.

Man, that kitchen is ADORABLE. I love love love the idea of fixing up houses. My spouse is fine with fixing up ours, but not others.

No house in Hawaii, but the house next door to ours (in Santa Barbara) was foreclosed on and is going up for sale soon. I don’t expect it to go for too terribly cheap though. It does need a lot of work. My off-the-cuff calculations show that this area is probably at about break-even point for renting/owning. Meaning, your annual cost to own is about the same as the annual cost to rent. For this house anyway. (Until recently, it was still cheaper to rent than own).

There are houses in the area that are in worse (as in, unliveable) condition, and that’s probably where there is money to be made.

I work in commercial real estate and am getting a Master of Science in Construction Management. Also volunteering at Habitat for Humanity. Last week I did framing and dry wall installation. Awesome way to pick up new skills!

This loan arrangement is one that depends on a certain amount of trust. I just put some of the cash towards closing, and the owner and I signed a legal document acknowledging the amount and its repayment schedule. Part of the plan was also that I buy/provide materials as needed, plus my work, and it all gets rolled into the loan.

From the owner’s perspective in this case, there is no risk in this arrangement – all the risk regarding my part of the loan is mine. But on the other hand, he takes on the risk of property ownership, renting it out, etc.
For people in a more formal arrangement, the builder in my position would also have a lien placed on the property for the loan amount – that gives them some more security.

In general, I don’t invest much in partnerships with others (this investment was less than 2% of my savings). I learned the downside of this the hard way in another business. So nowadays, I just save up and wait until I can do things alone, or we structure deals where the investment is small relative to the fun – like this one.

I’m curious about the loan structure you created. I spend most of my time managing rental properties and acquiring new ones. Of course, capital is the biggest obstacle now since traditional financing isn’t an option. What I’m curious about is the terms of your loan – did you do a set period for repayment (and what was it)?; how did you figure out the interest rate you wanted to charge?

I approached a potential investor with a 5 year re-payment at 5% and he felt it was low… that’s why I ask.

By the way, in my area at least (Birmingham, AL), the highest cap rates are achieved by investing in lower end foreclosures. For example, I bought one in September 2011 for $22,500 + $5,000 in repairs ($27,500 total) and am renting it at $695/month. I do budget more than $500 per year for repairs, though… I try to reinvest 8-10% of rents in repairs and maintenance. Is this price level (sub $50K) an option in your area?

Wow! That is a lot of rent for a house that costs less than a new minivan – congrats! There are no deals like that in my neighborhood, but you could come close with a foreclosure in one of the ‘bad’ parts of town, (which aren’t actually dangerous, just run down and full of mufflerless raised pickup trucks). I stay local to myself, just because quality of life at this stage is more important than maximizing profits. Your strategy still sounds great though.

Regarding the loan deal – mine is confidential and also not typical since it’s with a friend. But I would agree with your potential investor – to get a private investment I’d expect to pay MUCH more than 5%, and I’d want much more than that as an investor. When borrowing is involved, I’d rather just write a check from my home equity line of credit at 3.25%. But again because of quality of life at this stage, I pretty much stay out of borrowing and lending – cash is king! For earlier stages of ‘Stashing (i.e. pre-retirement), I still think careful leverage is a great tool.

Looks good MMM. Looks like you had to repair the roofing shingles on one side. You really should trim up those trees next to the house though or you’ll be making roof repairs again down the road. Personally, I’d consider ripping the tree(s) out which will stop the damage and make your house look a lot larger from the street.

I’d be down to be a silent partner and put in half the cash on a project like this. The way this could work in your example is we both put in ~$70k for joint ownership of the house. Then you first get paid for the extra property management work you do, and we divide the rest of the income.

You would be free to make all decisions about renovations and tenants, etc. I’d just put a portion of the money up, and share in the rental income.

We could negotiate splits and percent ownership of the house and whatever. I’d prefer if we both had equity in the property though. I have about $50k – $100k from my taxable portfolio that I’d be interested in investing with you.

Thanks for the idea Akratic! As mentioned above, I try to keep things totally separate from others in a business sense these days, so here is how a project would have to work if I happened to be involved:

– an investor (probably a CO resident who knows the area, unless they are very bold), would learn about the neighborhood I work in, and decide if they agree that it is a good investment at a certain price level.

– we’d keep an eye out together for properties meeting the criteria – probably a bank-owned one. They come up once per month or so. If a good one came up, we (or I) would tour and inspect it, do some detailed calculations, and if it looked profitable enough, the investor could decide to buy it.

– Mrs. M. is a licensed real estate agent in this area, so if investor approved, we could use her to speed the search and reduce the commissions paid. But any agent would be welcome.

– all ownership would be by the investor and they’d have full control. I would just provide any level of design, construction (including additional skilled workers as needed), and marketing support as desired – just on an hourly basis.

It would just be pay-as-you-go and there is no commitment, you can fire me at any time with no hard feelings. I would also not need a share of the profits. To me, it’s worth sacrificing profit sharing to keep things fun, simple, and free from conflicts of interest and tension.

– when the place is done, you can either rent it out (I can help with this if desired), or sell it (help also available), or just move in yourself if you happen to be in the market for a home in this area!

I’d be bold enough to do this from out of state without looking at the property (except online) and you making 100% of the decisions, but only if your skin were also in the game. The way I see it, there’d be no tensions or conflicts of interest, since you’d make 100% of the decisions as if it were 100% your capital. I’d just want to verify the numbers and the property online first, that’s it. And I could help you find good listings. I’d only be giving you money I can afford to lose (although I’d rather not lose it). You’d have full autonomy, but your risk, necessary starting capital, and upside cut in half.

We could even have one of those partnership buyout agreements ahead of time, where if either party gets sick of the arrangement, they can force a 100% ownership decision by offering the other partner a number. Either the other partner buys them out fully at that number, or they get bought out fully at that number. Easy, no tension. I’d have no intention of using this, but we could have it in place.

If you’re curious about my own motivation, I’m interested in investing in real estate, but my life plans currently make that difficult. Now that my ‘stash can cover my expenses on a 4% withdrawal, I’m thinking about spending the next four years living for a year each in the following cities: Chicago; Hong Kong; Cuenca, Ecuador; and Cape Town. I’m excited! But don’t want to sign up for anything I can’t deal with easily online.

Basically I’d just be cashing out my REITs and giving that money directly to you, because I believe that you’ll outperform the REITs. But because I don’t know you personally, I’d only trust you to make all of the decisions if you were sharing in the risk.

Anyway, it sounds like you’ve been burned by a partnership arrangement in the past, so I understand that you probably won’t be interested in this 50/50 ownership, 100/0 decision making thing. If you come around, you have my email address. And if I eventually settle in CO (it’s actually a top choice of mine), I’ll be in touch about the 100% ownership thing.

Great points Akratic. I think it is useful for other people to read about arrangements like this because it might help them when figuring out their own deals. I would have no problem with an arrangement like the one you proposed if I were not already retired – because it would present a great way to leverage my own earning power.

Things are just different for me now because I’m not motivated by additional money when it comes with the chance of adding extra complexity to our family life – it’s all for the fun, learning, or the chance to help someone out (plus have something interesting to write about here on MMM).

It’s the same reason I don’t do any promotional activities for this blog despite the fact that I can see many people making big bucks online these days – the writing and meeting people is fun. “Search Engine Optimization”, doing guest postings on blogs I don’t even read, or attending interviews with plastic TV news hosts would be less fun :-)

Because nobody bothered to empty the fridge while the house sat abandoned for over a year. We took it outside before opening it, and found some very educational things inside.

Did you know, for example, that meat left in a warm bag for a year actually becomes just a pure smelly brown liquid with no sign of meatiness? Also, processed junk food looks exactly the same after a year – it never decomposes other than just growing a slight fur of green mold in the corners.

Thank you Executioner – earlier you introduced the concepts of Luxury and Fantasy to the comments section, and now you have introduced Mystery!

I agree that things can tend to get a little bit serious around here at times. Just this morning, for example, one person posted a bossy comment about how my allowance for maintenance and vacancy was far too low, and I didn’t know what I was talking about, and blah blah blah.

I was like, “Please, friend, have you even read the rest of the articles in this foreclosure series? Are you aware that Mustachians are able to do better than the average person when it comes to operating efficiently, and indeed that’s the whole purpose of this blog? Are you next going to tell me that I can’t possibly live a comfortable life on under $30k per year, or it’s impossible to retire in one’s 30s, or I can’t ride a bike in winter, or my car maintenance expenses must surely be more than just one oil change per year?? …*DELETE!*.”

Great job! Congrats MMM, would love to do this with you. I like the idea of recycling stuff- upgrading houses, i have done it once, mostly paying other people but it still left me a good return on investment. i don’t have much clue about fixing or making things, but would love to. If I lived near you I’d say let’s do this! Especially with 9% rate, i have 0% rate right now and i don’t trust stocks anymore… but this is great, it’s your creation, it’s tangible, it livens up the neighborhood, helps the economy, recycles stuff, saves a house from possible destruction or at least further deterioration and you get a decent return for your risk and work… and my retirement suddenly seemed a lot closer :)

But now after reading your description of what you’re looking for in an agreement, I don’t have that type of capital available. I’d love to do something along these lines, but I’d need to be one investor out of a couple or more.

That’s absolutely lovely in all respects, including your self-deprecating comments before the smashing photos. Reminded me of when I decide to read someone a poem I wrote. (If only the poems sounds as good as your work looks! ;) )

I’d love to have a go at this, but the sums are vast to even buy a property in London (UK), hugely increasing the risks.

That’s a good point about the staging. Normally I would recommend a clean house with some very sweet staging when offering a place for rent. In fact, I’m working on an article about marketing a rental house right now.

However, this time we got even luckier (fortunately for us but unfortunately for the point I’m trying to make with the upcoming article). My friend put up an ad with only a few pictures of the unfinished house in December. Someone called and toured it the first day, complete with tools and sawdust everywhere and unpainted walls, and said “I love it! Can we move in before you’re even done?!”. Normally you should not expect it to be this easy!

For the garage – yeah, I cut back the first couple feet of the entire old roof sheath, re-decked it with plywood, then tucked in some fresh underlayment, metal drip edge, and semi-matching shingles. It’s not pretty when viewed up close, but at least it will keep that junky old garage dry for many more years.

When I free up my money from my current foreclosure investment, I’d totally be down in funding a project for you. Heck, I’d even be willing to come up there on some weekends for some apprenticeship work just to learn from your badassity.

Let me know if your serious about that, and I’ll certainly let you know when I get my house sold…

We did a large renovation project with an investor/friend 4 years ago. It was a large farmhouse that was owned by a home owners association but they weren’t maintaining it. We found it on Craigslist. They had already done the paperwork to divide it into 3 condos but it needed a ton of work. We did the demolition ourselves but hired a general contractor to make it pretty again. Doing the demo ourselves saved us a ton of money. We also did the wallpaper removal, spackling, sanding and painting ourselves.

Our investor/friend kept one of the units, we kept one and we sold the third unit, which then brought our total cost way down for each remaining unit.

We rent ours out for weekly vacation rentals in the summer which pays for itself with 8 weeks rented. It’s not a profit maker but it is appreciating and we have a beach house to enjoy ourselves in the shoulder seasons (May-June, Sept-Oct) that doesn’t cost us anything out of pocket.

Yes, I know, this is Switzerland, but for 200 grants you get a house in a side valley where no one wants a house or for 100k$ this, a summerhouse where you can spend some time in the sun, outside of a hot city with too much concrete walls heated up. Most of the money changes hand for the soil. Soil is expensive here: ~1000 Swiss Francs in a middle class neighborhood per square meter.
Hm, 100k$ still under 100kSfr, I should stop google things that depress me out.
If I wanted to copy your investment strategy, I certainly had to invest two to three years of work. Why do it when I can get a very cheap credit and having it done within four months, professionally and with a guarantee? The credit is paid off within three to five years and I can work whatever I can best meanwhile. This is the strategy that is chosen around here.

The quick answer, while you wait for Mr or Mrs MM to write an article about posting a craigslist ad for rentals, is to create it using zillow.com I’m not a real estate professional (they tend to hate zillow), but I do own six houses in three states and zillow works for me. Just claim your property and post lots of quality pictures of the house without clutter or personal effects. CL will only host 8 photos, and MLS will limit you to 30 (no need to use the MLS for rentals if you are in a metropolitan area serviced by CL) and zillow lets you put up unlimited photos. Get enough pics so that the layout can be determined. Be sure to get pictures of the kitchen, living room,all the bedrooms and all the baths and some exterior shots. Highlight all good features. Make the renters envision a life in your house. After you have your pictures uploaded and in order, list the house for rent on zillow (free) and then also click the export ad to Craigslist link and it will give you the HTML to cut and paste and have a nice professional looking CL ad. Final tip, even though all the zillow pics appear in the CL ad, you still need to upload you best shot to CL for them to host, as this will be the thumbnail that shows up on the CL searches.

Great post MMM. I’ve been reading your blog for awhile and really enjoyed all of them.

It’s a really nice rehab project. As a real estate investor I have often thought about whether to flip properties or pursue a long term buy and hold strategy. I think the best option in the long run is to hold the property to keep getting rental income. If you flip the property you would have lost the income stream and you have to go out there and chase it again.

If I could humbly suggest, perhaps you could feature more real estate stuff as I truly believe real estate is a great generator of long term wealth (well, during a time when prices don’t go out of hand anyway) and definitely can help other Mustachians get to financial freedom a lot faster.

Hi MMM, you did a gorgeous job on the place. The fine details capture a renter’s heart for sure. You’re lucky you can do this in the USA. In Israel, you have to pay 8% of the purchase price to the government for owning a second property, and something insane like 20K USD PER YEAR if you have 3 properties or more (that law is in the works). Yes the government is crazy and stupid. I won’t go into details about why but in a nutshell the government doesn’t want people to own apartments as an investment because this way they are supposedly fixing the housing problem (housing prices went up by more than 100% in the past 10 years). So I’ve been reading the blog from the beginning and there’s so much you Americans have going for you. I hope you make good use of it. I’m not complaining, I’m FIRE already despite the difficulties here.

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